Shareholders' equity
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In business and accounting, the shareholders' equity refers to the amount of assets that are owned by a company's shareholders. However, there is much more to this value. Stockholder's equity is perhaps the most abstract concept to grasp in terms of the accounting equation when compared to its counterparts: assets and liabilities. Early on, accounting students commonly see stockholder's equity as something similar in nature to assets or liabilities.
It is, however, more dynamic. Stockholder's equity is a residual value that enables us to reconcile assets and liabilities. Stockholder's equity (which is figured each year for reporting purposes) is a calculation of retained earnings from the prior year + net income of the year at hand (revenues - expenses) - dividends paid during the year at hand. So technically, when a company looks at stockholder's equity (or specifically the statement of stockholder's equity), they can learn several things: how much was left over (positive or negative in value) last year, what is the difference in revenues and expenses experienced by the company (net income or net loss) of the year at hand, and how much was paid out in dividends in the year at hand.
If we have a value of retained earnings, what does this mean? First, consider the scenario if stockholder's equity was zero. This would mean that assets equaled liabilities. However, what would be the case if stockholder's equity were positive? By rule of the accounting equation, assets would either increase or liabilities would decrease.
An increase in stockholder's equity is a 'good' thing. For example, if a company makes a sale, this results in revenue which will likely (if in a mature business) outweigh associated costs and result in positive net income. This increases net income which by rule increases stockholder's equity.
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Accounting
The shareholder's equity can be calculated as the value of a company's assets less the value of its liabilities. Shareholders' equity appears on the liability side of a company's balance sheet. International Accounting Standards Board defines equity in the following way (IFRS Framework quotation):
Equity is the residual interest in the assets of the enterprise after deducting all its liabilities. [F.49(c)]
Accounts
Shareholders' equity consists of basic share capital and reserves - see Reserve (Accounting).
Accounts listed under shareholders' equity include (example ([1])):
- Stock options
- Stock capital (share capital) (can include redeemable preferred stock, preferred stock, common stock)
- Retained earnings
- Treasury stock
- Capital surplus (stock capital, share capital, paid in capital)
Financing
Equity financing is the method by which a company raises money by selling shares, for example through an IPO.